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Friday, February 24, 2012

Market Week Wrap-up

- Investors watched in amazement this week as
the DJIA flirted with 13,000 and many wondered just how much longer the equity
rally could last. The Eurogroup has approved the new €130B bailout for Greece,
the PSI private debt exchange is ready to run and default armageddon has been
postponed for the moment. Outside of market frothiness, many are concerned
about growth in the real economy. The EU Commission released forecasts
indicating that the euro zone economy would contract this year, and there was
word that Chinese Premier Wen would announce at the upcoming People's Congress
that China will target GDP of less than +8%, marking the first time in seven
years that China will forecast growth below this key level. Speculation and
Iran tensions pushed oil prices out to concerning levels: the front-month WTI
contract gained more than 6% this week, settling above $109, at its highest
level since last May. Brent crude settled above $125, which could cause major
headaches for heavily burdened European economies. There was little US economic
data on tap, besides a final February U of Michigan confidence that pushed out
to a one-year high and a January new home sales figure that dipped slightly
after four months of steady growth. Looking ahead, the G20 finance ministers
are meeting in Mexico over the weekend, the first of several confabs ahead of
the annual G20 leadership meeting in June. They will discuss, among other
things, ways to bolster funding for the IMF in the hour of Europe's need,
although few officials from outside the continent believe that more resources
should be dumped into the European crisis. Meanwhile, markets will be eager to
hear what the "voluntary" participation rate will be for the Greek
PSI exchange which was formally launched on Friday. For the week, the S&P
500 tacked on 0.3%, the NASDAQ gained 0.4%, and the DJIA rose 0.3%.

- There were some troubling signs among the major retailers reporting this
week. Walmart's Q4 results were disappointing, as revenue missed expectations
and the bottom line was only just in line, excluding some one-time items.
Walmart's guidance included expectations for negative comps in Q1. Kohl's saw
negative comps in Q4 and its Q1 guidance was very soft. Sears' Q4 results were
grim, with comps in the red and profits sinking lower. Shares of Sears rocketed
higher after earnings, however, as the firm announced plans to sell stores and
business units. Other major retailers had a better fourth quarter: Home Depot's
earnings and comps held up well, Macy's met all expectations and Target had
solid results and offered very strong forecasts for Q1 and FY12. On the
conference call, Target said that sales volumes have returned to the strong pre
holiday pace.

- PC makers Dell and Hewlett-Packard reported lackluster quarterly results.
Dell's enterprise business is holding up but sales to consumers continue to
erode. Hewlett-Packard's Q1 profits fell sharply on a y/y basis and the firm's
guidance for Q2 is even worse. Margins shrank, the Europe business came under
major pressure and the firm was still feeling the impact of the Thai flooding
situation. CEO Whitman said she expects to see a better Q2 for the PC division,
but that the company's turnaround will take time.

- In other earnings, shale driller Chesapeake had a mixed Q4 report, with
earnings a bit ahead of expectations but revenue a bit short. The firm's FY12
earnings guidance was pretty solid, and it said it plans to triple Utica oil
shale drilling rig deployments in the next year. Homebuilder Toll Brothers saw
a loss in its Q1, with revenue falling well short of consensus estimates due to
a small decline in deliveries in the quarter. Nevertheless, Toll's backlog and
net signed contract growth was impressive in the quarter, boding well for the
future. AIG reported a substantial profit in Q4, although most of the firm's
gains were from big tax benefits. AIG recognized $17.7B in tax benefits in the
quarter, which dwarfed the $1.6B in operating income from its insurance
businesses.

- The week began with risk appetite weighing upon the greenback in the wake of
the Chinese reserve requirement ratio (RRR) cut, plus optimism that after
months of haggling and heartache, the euro zone would be successful in
assembling the new bailout for Greece. With the threat of a Greek default at
least temporarily off the table, the focus shifted to the question of growth.
Data out this week was not particularly reassuring on this front, and on
Wednesday, the EU Commission's interim forecasts for 2012 officially recognized
that the euro zone as a whole would experience negative growth for the year,
with Spain, Italy, Greece and Portugal all poised for significant economic
contractions. Preliminary PMI data out of euro zone nations reinforced these
negative assessments, with the first look at February manufacturing PMIs mostly
at or below the key 50 level. Note also that the Feb IFO survey in Germany saw
its fourth sequential month of improvement, indicating that there are still
islands of growth in Europe. EUR/USD entered the week around 1.3200 but ended
above 1.3450 by Friday afternoon on the back of the Greek bailout approval and
the formal initiation of the private debt exchange (PSI).

- On Monday the Eurogroup agreed to release €130B fresh bailout funding to
Greece, alongside a 53.5% haircut as part of the PSI exchange. Now euro zone
parliaments need to approve the deal, although the consensus is that there
should not be any stumbling blocks in this phase of the process. Ominously,
German Finance Minister Schaeuble sent a letter to the Bundestag urging support
for the package that stressed Germany might need to consider additional
assistance for Greece in the future. Greece formally launched the debt swap
offer on Friday, and the chief unknown at this point is how many of the
bondholders will participate in the exchange. Greece has threatened to
implement a collective action clause (CAC) as part of the exchange if too few
holders participate, and some fear that doing so would raise the threat of
credit default swaps (CDS) being triggered.

- The BoE minutes initially softened sterling mid-week as the MPC was split on
the amount to increase the asset purchase target. Two members sought more than
the agreed upon amount of £50B. EUR/GBP hit fresh 2012 highs above 0.8500.
GBP/USD was back above the 1.58 by Friday.

- USD/JPY moved above its Aug 2011 intervention high of 80.30 this week.
Japanese officials expressed satisfaction about the softer yen and reiterated
that they would continue to closely monitor developments. Various analysts
noted that the break above 80.30 would ignite more upside potential in the
pair. USD/JPY exited the week at six-month highs and EUR/JPY moved above
108.00, at five-month highs.

- The People's Bank of China helped goose market sentiment over the weekend
with another cut to its reserve requirement ratio. Taking the rate to 20.50%,
this second RRR cut was anticipated as early as the Lunar New Year holiday
period in late January. The subsequent rise in January inflation put near-term
policy easing in doubt, however a fresh round of weakness in the trade data
released last week was seen as a key catalyst for the cut. PBoC officials noted
the latest move will ensure reasonable levels of money supply in the system,
while also affirming the "prudent" stance on monetary policy will not
change. February HSBC flash manufacturing PMI numbers were also received
positively -- while still in contraction territory, a 49.7 print marked a
4-month high. The Shanghai Composite continued its steady climb to close the
week around 2,440, a 3-month high.

- Down under, the Reserve Bank of Australia's February meeting minutes as well
as testimony by RBA Governor Stevens suggested the central bank may take a more
extended pause after two consecutive cuts in cash target rates. RBA minutes
indicated that policymakers are comfortable with rate levels that are
"consistent" with historic averages and would only undertake further
easing if conditions weakened "materially." Governor Stevens noted
that the economy is still in an upswing, with the current stance of monetary
policy now seen as mostly neutral. In Canberra, Australia is headed for a
Labour party leadership vote on Monday after a surprising challenge from former
PM Rudd. Current PM Gillard is widely expected to survive the challenge and
remain in her post until the 2013 general elections.